Credit Checks & Terms

Why credit control starts before the first invoice

Most businesses think of credit control as what happens after an invoice goes unpaid. In reality, the most effective credit control decisions are made before any work begins — when you decide who to extend credit to, how much, and on what terms.

A customer who doesn't pay is often a customer who showed warning signs at the credit application stage. This lesson is about building the front-end controls that reduce the risk of bad debt — without making your business difficult to do business with.

Credit checks: what they involve

A commercial credit check typically covers:

ASIC business registration check

Confirm the company exists, is not deregistered or in administration, and is registered at the address provided. Free via the ASIC Connect search at asic.gov.au. This is your first stop for any new business customer.

ABN and GST status

Verify the ABN via the Australian Business Register. A valid ABN is a basic indicator of a functioning business. A recently registered ABN for a company quoting a large contract is a flag worth noting.

Director searches

ASIC provides a paid search showing the directors and officeholders of a company. If the company has changed directors recently, or if a director appears on multiple previously deregistered companies, that is worth investigating before you extend credit.

Trade credit bureau reports

Commercial credit bureaus (illion, Equifax, Creditor Watch) hold data on payment defaults, court judgments, and payment behaviour reported by other creditors. A bureau check for a new customer proposing a significant credit limit is money well spent.

Trade references

Ask new customers for two or three trade references — other suppliers they have paid over an extended period. Call the references rather than accepting written ones. Ask specifically: "Have they ever gone overdue? How did they respond when they did?"

The depth of the check should be proportional to the credit exposure. A $500 one-off order from a local business may not warrant a bureau report. A $50,000 ongoing supply arrangement almost certainly does.

The credit application

A credit application is a document a new customer signs before you open an account for them. It serves two purposes: it gathers the information you need to assess credit risk, and it creates a binding agreement that your terms of trade apply to the relationship.

A well-designed commercial credit application includes:

• Full legal entity name (company name, ACN, or individual name with date of birth)
• ABN and GST registration status
• Trading name if different from legal name
• Registered address and principal place of business
• Names and contact details of directors or partners
• Bank details for electronic payment (for your records; not used to debit without authority)
• Trade references (two or three, with contact details)
• Requested credit limit
• Agreement to your terms of trade (by signature, with a copy of the terms attached)
• Personal guarantee section (see below)

The credit application template at merion.com.au covers all of these elements. Download it, customise it for your business name and terms, and use it consistently.

Terms of trade: what they must include

Your terms of trade are the legal framework for every transaction. If you do not have signed terms of trade, your recovery options are significantly weakened. Courts have occasionally implied terms from industry practice, but an explicit signed agreement is always preferable.

Your terms must address:

• Payment terms — when invoices are due, in what currency, and by what method
• Interest on overdue accounts — the rate, when it begins to accrue, and that it is charged in addition to the principal
• Recovery costs — that the customer will pay reasonable collection costs (agency fees, legal costs) if the account is referred for recovery
• Title retention — if you supply goods, that title (ownership) does not pass until payment is received in full (a Romalpa clause; also relevant to PPSR registration)
• Jurisdiction — which state's law governs the contract
• Dispute resolution — the process for raising and resolving disputes

Terms of trade should be provided with the credit application — not buried in invoice footers — and the customer must sign to confirm they have read and accepted them. A tick-box on an emailed application is acceptable evidence of acceptance if you can show the terms were attached.

Personal guarantees

When your customer is a private company with limited assets, a debt against the company may be difficult to recover if the company becomes insolvent. A personal guarantee converts that company liability into a personal liability of the director or owner — meaning you can pursue them personally if the company cannot pay.

Personal guarantees are appropriate when:

• The credit exposure is significant
• The company is a small private entity with few disclosed assets
• The director or owner is the primary economic beneficiary of the business

A guarantee must be in writing, signed by the guarantor in their personal capacity, and ideally witnessed. Many credit applications include a personal guarantee section for this purpose. Consult a lawyer if you are creating a standalone guarantee document — the wording matters.

Setting credit limits

Once you have assessed a customer's creditworthiness, set a credit limit — the maximum amount they can owe you at any time. A credit limit protects you from over-exposure to a single customer. If their account reaches the limit, stop supplying or invoicing until the balance is reduced.

Review credit limits annually, or when a customer's behaviour changes (e.g., payment times slow, they request a higher limit, or they change ownership).

Related tools and resources

• Commercial credit application template — download and customise for your business
• Debt age impact calculator — how creditworthiness deteriorates as debts age
• Credit Control Playbook — the full Merion guide